Forest Revs Down, Swings to Loss

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Forest Laboratories, Inc. (FRX) reported a third quarter fiscal 2013 loss of 29 cents per share, well below the year-earlier earnings of $1.04 per share. Forest Labs’ results were hit by the loss of exclusivity on Lexapro as well as the disappointing performance of Namenda.

Excluding acquisition-related amortization costs, third quarter fiscal 2013 loss came in at 21 cents, down from the year-ago earnings of $1.08 per share. Third quarter fiscal 2013 loss was wider than the Zacks Consensus Estimate of a loss of 13 cents per share.

Third quarter revenues declined 40.2% to $722.7 million, with net sales falling 41.6% to $678.0 million. Total revenues were well below the Zacks Consensus Estimate of $764 million.

The Quarter in Detail

Third quarter product revenues declined 41.6% to $678.0 million. While Lexapro revenues fell 97.0% to $20.3 million, Namenda, which is approved for the treatment of moderate and severe Alzheimer’s disease, delivered revenues of $345.8 million, recording year-over-year growth of 1.6%.

However, Namenda revenues declined 5.9% on a sequential basis. Forest Labs said that higher contract rebates, largely driven by the Medicare Part D Coverage Gap liability, were responsible for Namenda’s performance.

Lexapro sales were negatively impacted by the entry of additional generics in the market following the expiry of the Hatch-Waxman six-month exclusivity period on Sep 13.

Bystolic, Forest Labs’ beta-blocker for the treatment of hypertension, posted revenues of $108.8 million, up 20.1% from the year-ago period. Forest Labs is looking to drive Bystolic's growth by providing additional data on the appropriate use of the product.

Forest Labs is also working on extending the product’s lifecycle and is conducting a phase III study with a fixed dose combination of Bystolic and valsartan (the market leader) for hypertension. A fixed dose combination product would expand the patient population for Bystolic. Top-line data should be out this year. Approval as a first-line treatment would also boost sales significantly.

Savella, which is approved for the management of fibromyalgia, posted revenues of $25.6 million, down 2.7% from the year-ago period. Savella’s performance remains disappointing.

Teflaro, launched in Mar 2011 for the treatment of patients suffering from acute bacterial skin and skin structure infection and community acquired bacterial pneumonia, posted revenues of $11.5 million, slightly above $10.0 million posted in the second quarter of fiscal 2013. Teflaro’s performance continues to disappoint.

Two other new products, Daliresp and Viibryd, were launched in Aug 2011. While Daliresp, which is approved for the treatment of chronic obstructive pulmonary disease (:COPD), recorded revenues of $17.5 million (down from $19.5 million in the second quarter), Viibryd (vilazodone HCl), approved for the treatment of major depressive disorder (MDD) recorded revenues of $40.6 million (up from $39.9 million in the second quarter).

Two more products were launched in Dec 2012 – Tudorza (:COPD) and Linzess (treatment of irritable bowel syndrome with constipation and chronic idiopathic constipation in adults). While Tudorza’s initial trade stocking was $12.2 million, Linzess’ initial trade stocking was $19.2 million.

Contract revenues came in at $38.3 million, up from $34.1 million in the year-ago period. Benicar co-promotion income increased 14.6% year-over-year to $36.0 million.

SG&A expense increased 8.2% to $428.4 million in the reported quarter. Forest Labs continues to focus on promoting its new products. R&D spend increased 22.9% during the quarter.

Fiscal 2013 Guidance Adjusted

Following the release of third quarter fiscal 2013 results, Forest Labs adjusted its outlook again. The company now expects earnings to come in towards the lower end of its previously issued guidance range of 45 - 60 cents per share (excluding acquisition-related amortization). The Zacks Consensus Estimate for fiscal 2013 is currently 27 cents.

Forest Labs now expects revenues in the range of $3.1 - $3.2 billion (old guidance: $3.2 billion). The Zacks Consensus Estimate for fiscal 2013 is currently $3.2 billion.

Forest Labs’ third quarter fiscal 2013 results were disappointing with the company posting a wider-than-expected loss. Results were mainly affected by the entry of additional generic competition for Lexapro. Namenda’s performance was also disappointing. We note that Forest Labs had cut its guidance for Namenda in the second quarter of fiscal 2013. Moreover, the performance of new products, especially Teflaro, has been below expectations.

However, we remain encouraged by Forest Labs’ progress with its pipeline candidates. The company has launched several new products over the past couple of years and is looking to launch additional products going forward. We have a Neutral recommendation on Forest Labs, which carries a Zacks Rank #3 (Hold).

Stocks that currently look better-positioned include Valeant Pharma (VRX), which carries a Zacks Rank #1 (Strong Buy).

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